The AICPA Statements on Standards for Tax Services Explained

The Statements on Standards for Tax Services (SSTS) issued by the American Institute of Certified Public Accountants (AICPA) are the enforceable ethical standards for CPAs providing tax services. These standards, revised effective January 1, 2024, guide practitioners in upholding the integrity of the profession and the tax system. The framework consolidates previous rules into standards covering general principles, tax compliance, tax consulting, and tax representation.

The primary objective of the SSTS is to balance a CPA’s role as a client advocate with their responsibilities to the tax system. These standards address the realities of modern tax practice, from the positions taken on a tax return to the advice given to clients. Originally issued as advisory statements, they were later made enforceable for all AICPA members to ensure a consistent and high level of professionalism.

Compliance with the SSTS is mandatory for AICPA members. The standards are also often integrated into the rules of conduct by the state boards of accountancy that license CPAs. This oversight means that adherence is a component of a CPA’s licensed ability to practice.

The Standard for Tax Return Positions

The standard governing tax return positions is a core component of the SSTS. Under SSTS No. 2, Standards for Members Providing Tax Compliance Services, Including Tax Return Positions, a CPA must have a specific level of confidence before recommending a tax treatment. A “tax return position” is any conclusion a CPA reaches on an item for a tax return.

The primary requirement is that a CPA must possess a “good-faith belief that the position has a realistic possibility of being sustained on its merits.” The “realistic possibility” standard is interpreted as having at least a one-in-three chance of success if challenged by the IRS. This requires the CPA to perform a thorough analysis of relevant tax law, regulations, and judicial decisions to conclude that the position is well-grounded.

For example, if a freelance graphic designer uses a new computer 90% of the time for business, the CPA would likely have a good-faith belief that deducting 90% of the cost has a realistic possibility of being sustained. Claiming a 100% deduction when there is clear personal use would fail this test.

An alternative, lower threshold exists, known as a “reasonable basis.” A position that does not meet the realistic possibility standard may still be taken if it has a reasonable basis and is prominently disclosed to the IRS. A reasonable basis is a lower bar, suggesting the position is not frivolous but lacks the substantial support of the higher standard.

To ethically proceed with a position that only has a reasonable basis, the CPA must ensure it is formally disclosed on the tax return using IRS Form 8275, Disclosure Statement. This disclosure explains the position to the IRS and can shield the taxpayer and preparer from certain penalties if the deduction is disallowed.

CPA Duties in Return Preparation

The SSTS outline specific procedural responsibilities a CPA must follow when preparing a tax return. A foundational duty involves answering all applicable questions on a return. CPAs must make a reasonable effort to obtain the necessary information to complete every relevant line item and schedule before signing.

CPAs may rely in good faith on information their clients provide without performing an independent audit of every detail. This allows for an efficient tax preparation process, letting a CPA accept a client’s summary of expenses or contributions at face value. This reliance is not absolute, however.

A CPA cannot ignore information they are aware of that contradicts a client’s statements. If information appears incorrect, incomplete, or inconsistent, the CPA has a duty to make reasonable inquiries. For example, if a client’s claimed business mileage seems excessive for their stated activities, the CPA must ask for clarification.

It is permissible for a CPA to use a client’s estimates when obtaining exact figures is impractical, so long as the estimates are reasonable. For instance, if a client lost some receipts for minor business expenses but can reasonably reconstruct the amounts, those estimates can be used. The CPA must not, however, present these estimates in a way that implies a level of accuracy that does not exist.

The revised standards also introduce duties related to technology and data security. CPAs must make reasonable efforts to safeguard taxpayer data. Furthermore, when using electronic tools for tax services, members are required to exercise due professional care to ensure technology is used competently.

Advising Clients and Correcting Errors

When a CPA learns of an error on a client’s previously filed tax return, their responsibility is to promptly inform the client of the error and its potential consequences. These consequences can include back taxes, penalties, and interest. The CPA should also recommend corrective action, which involves filing an amended return.

The CPA is not obligated to report the error to the IRS and is prohibited from doing so without the client’s permission due to confidentiality rules. If the client chooses not to correct the error, the CPA’s duty is fulfilled by having properly advised them. The CPA must then consider whether to continue the professional relationship, as representing a client who refuses to correct significant errors could pose future ethical conflicts.

The standards, detailed in SSTS No. 3, Standards for Members Providing Tax Consulting Services, also govern how CPAs provide tax advice. The advice should be communicated clearly to the client, often in writing, to avoid misunderstandings. This communication should explain the tax implications, potential risks, and disclosure opportunities. If a CPA assists in implementing tax strategies and the law subsequently changes, the CPA must inform the client of these new developments.

Departing From Prior Rulings

The SSTS provide guidance for recommending a tax position that differs from a prior ruling in an administrative proceeding or court decision involving the same client. A CPA is permitted to recommend a departure from a previous ruling, but only if the current position meets the “realistic possibility of being sustained on its merits” standard. This requires a substantial and well-supported reason for the change, not simply disagreeing with a past outcome.

Consider a scenario where a client’s deduction for a specific business expense was disallowed by the IRS in a prior year’s audit. In a subsequent year, a new tax law is passed or a court case is decided that directly supports the deductibility of that expense. In this situation, the CPA could ethically recommend that the client claim the deduction on their current tax return, despite the prior adverse ruling.

The CPA’s recommendation must be based on new developments or a stronger legal argument that has emerged since the original decision. The CPA must document this new support thoroughly. Recommending the same position without any change in the underlying facts or law would violate the standards.

Enforcement of the SSTS

The SSTS are enforceable rules for all members of the AICPA. The enforcement process is handled by the AICPA’s Professional Ethics Division, which investigates potential violations and imposes disciplinary actions.

When a complaint is filed against a CPA, the Professional Ethics Division undertakes an investigation. If a violation of the SSTS is found, the disciplinary actions can vary based on the severity of the offense. For minor infractions, the outcome might be a letter of required corrective action, mandating additional professional education.

More serious violations can lead to harsher penalties, including suspension or permanent expulsion from the AICPA. While expulsion does not automatically revoke a CPA’s license to practice, it carries a significant professional stigma. The results of these disciplinary actions are often published as a deterrent for other members.

The impact of an SSTS violation can extend beyond the AICPA. Most state boards of accountancy incorporate the SSTS into their professional conduct rules. A violation found by the AICPA can trigger a separate state board investigation, which could result in sanctions up to and including the revocation of the CPA’s license.